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Comment by Terr_ | Hacker News Reader

> The causes of shortages are well established. Everyone wants to pay less, and the middlemen who procure and distribute generics keep driving down wholesale prices. The average net price of generic drugs fell by more than half between 2016 and 2022, according to research by Anthony Sardella, a business professor at Washington University in St. Louis.

> As generics manufacturers compete to win sales contracts with the big negotiators of such purchases, such as Vizient and Premier, their profits sink. Some are going out of business.

I'm confused, how is it that the prices are being driven so low that the supply dries up despite continued demand?

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Premier and Vizient are group purchasing organizations which handle all the supply for a ton of hospitals - 800k or so hospital beds between the two out of about a million total in the US. They started out as hospital purchasing groups which were created by hospitals who banded together to get better deals so they usually monopolize purchasing for an entire hospital. Now they’ve grown so big they’ve got monopolistic pricing power as consumers (I don’t know the right economic term) since there are so few organizations buying for all the hospitals.

When buying syringes, bandages, and most of the things hospitals need, that’s not a big deal but the way many oncology drugs are administered these organizations end up handling all of the negotiations instead of pharmacies and insurance companies. Patients and even their healthcare providers have basically zero say in the purchasing because it’s all rolled in.

Since the US is the most profitable market in an already low margin business, the generic manufacturers can’t justify the production lines for cancer drugs without at least one of these clients so they‘re driven to extreme price wars. In good times, they eek out a profit, but in bad times when variable costs go up, they’re no longer viable.

I think the word you might be looking for is "Monopsony"

https://en.wikipedia.org/wiki/Monopsony

I wonder if premier and vizient have a vested interest in some of the suppliers going out of business, like if they have indirect ownership in competing suppliers.

- Patients can only buy cancer medication from their healthcare providers, and expect it to be covered by health insurance.

- Healthcare providers will only buy cancer medication whose prices are low enough to be covered by insurance.

- Insurance scours the market for the lowest cost providers and states it will only cover that cost, no higher.

- If the cost of drugs goes up, insurance does not immediately renegotiate prices. Healthcare providers stop buying the drugs while waiting for low cost capacity to re-appear so they don't take a loss on the care.

- Drug companies go out of business because they can't sell their inventory, driving up prices further while reducing supply.

We really ought to have a government funded drug manufacturer...

Cancer drugs in particular have this exceedingly weird market where oncologists buy drugs from distributers and resell them to their patients. Everybody agrees it's a bad way to do it, and nobody would have deliberately designed it that way, but it's a system that's hard to disassemble now that it's in action.

Relative profits are "drying up" because they can't charge $10k per dose and throw away half and quarter doses.

moving into biologics

are they actually? The generic companies are making biologics now? Biologic generics, or technically biosimilars, are supposedly much harder to make, which is why a lot of them remain expensive even when the patents expired for a long time (e.g. insulin)

> I'm confused, how is it that the prices are being driven so low that the supply dries up despite continued demand?

The incremental cost of an additional dose is low, so as long as the production line is operating all is well.

But then the line shuts down for whatever reason - and reopening it (or a new company starting one) costs way way too much. i.e. it's not worth it for them to do that at current prices. They would have to charge far more than the existing companies charge, and no one would buy the drug.

It's basically a timing issue, long term contracts mean that prices can not rapidly adjust for market disruption, combined with very very long lead time for additional production, means that the market can stay disrupted for extended periods of time. Years even.

It will eventually adjust, but it will take so long that current patients are in trouble.

The solution is a buffer, keep production in a strategic reserve.

It's unclear whether the demand would support a higher price I guess.

Alternatively, another way of looking at this is perhaps that the distributors are seeking a profit, and so are demanding low prices from the manufacturer, meaning that high cost manufacturers go out of business, reducing supply. However, this may be inefficient, in that demand may exist at higher prices, that could support more manufacturers if not for the distributor.

Sounds like it's a lot of things, but one thing mentioned in the article is pricing pressure from plan administrators. Large plans have outsized influence on pricing. Mix that with unscrupulous manufactures that cut corners to lower costs and you have a mess. Those bad manufactures can agree to go lower than legit manufactures and they then let the plan administrators force pricing lower for everyone. At some point the legit manufacturers are priced out, leaving only the bad ones. Then when a bad one implodes, the market isn't there anymore. By this point plan administrators have anchored pricing too low and are likely going to be slow to adjust (if they adjust at all).

NB: I'm not involved in the medical field or in economics, so take my statements as what they are, conjecture.

Hm, so in other words perhaps there's a distributor/middleman layer without enough competition, one whose most-profitable situation comes from focusing on high-margin drugs.

I think this is one of those "race to the bottom" things where businesses endlessly undercut each other until everyone loses

"Race to the bottom" is bullshit because there is a floor equilibrium of difficulty of manufacturing and regulatory administration, and there is relatively constant demand. People never stop getting sick.

Generics need more social ventures to keep critical medications supplied on the market. One recent example is the shortage of amphetamine stimulant medications.

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